Understanding the Current Landscape
For years, many borrowers have turned to NBFCs for flexible loan products. Often called 'flexi-loans' or 'personal lines of credit', these facilities have been incredibly convenient. Under this model, a borrower is sanctioned a total credit limit. You
could draw a portion of this limit, repay it, and the available credit would be restored, ready to be used again. For instance, if you had a ₹5 lakh limit, you could borrow ₹2 lakh, repay ₹1 lakh, and that ₹1 lakh would become available again for you to draw without a new loan application. This structure functions very similarly to a revolving credit facility, prized for its convenience and ability to serve fluctuating financial needs, making it a favourite for both personal borrowers and small businesses seeking working capital.
The RBI's Proposed Change
The Reserve Bank of India has released draft guidelines that propose a significant clampdown on this practice for NBFCs. The regulator intends to restrict NBFCs to offering only 'term loans'. A term loan is defined as a credit facility with a fixed principal amount, a predetermined repayment schedule, and a clear end date. The most crucial part of the proposal is this: once a part of the principal is repaid, the sanctioned limit cannot be restored or replenished. In simple terms, a repayment will now be treated as a permanent reduction of your loan outstanding, not as a deposit you can dip into again later. The only exception to this rule would be for NBFCs that are specifically authorised by the RBI to issue credit cards, a very small subset of the industry.
The Core Distinction Explained
The fundamental difference lies in how repayments are treated. With the current revolving or 'flexi' model, making a part-payment often feels like topping up a wallet; the funds can be re-borrowed. Under the RBI's proposed term-loan-only structure, a part-payment is a one-way street. It reduces your debt permanently. If you need more funds after making a repayment, you would likely need to apply for a fresh top-up loan, which would involve a new assessment by the lender. This shifts the power from a fluid, ongoing credit line to a series of distinct, structured loans. The convenience of instantly redrawing funds from a sanctioned limit will effectively disappear for these NBFC products.
Why This Shift Matters for Borrowers
For borrowers, this is a double-edged sword. The primary benefit is enhanced transparency and protection against potential debt traps. A fixed repayment schedule makes it easier to track progress and ensures that every rupee paid goes towards reducing the principal, leading to faster loan closure and potentially lower overall interest costs. The RBI's concern is that revolving credit can sometimes be used to service existing dues, a practice known as evergreening, which masks underlying financial stress. On the downside, borrowers will lose a significant amount of flexibility. The convenience of having an on-demand credit line for emergencies or business needs will be replaced by the more formal process of applying for a new loan each time.
Impact on the NBFC Sector
This proposal is set to cause a major shake-up in the NBFC sector, particularly for lenders with significant exposure to flexi-loan products. These products have been instrumental in fostering customer stickiness; a customer with an available credit limit is more likely to return to the same lender. They also support the growth of Assets Under Management (AUM) because the loan book depletes more slowly when customers can redraw funds. NBFCs will now have to redesign their product offerings and adapt their business models. They may need to pivot towards more traditional term loans or find alternative ways to offer flexibility, perhaps through faster processing of top-up loans. Analysts suggest that lenders who can quickly adapt and perhaps offer substitute products might be better placed to handle the transition.
